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Markets are Changing. Have You Kept Up?

Stock market volatility picked up in February as interest rates rose, but most stocks ended the month with gains. The one exception was the tech-heavy Nasdaq 100, which slipped -0.1%, while the S&P 500 gained 2.8%, and the Dow was up 3.4%. 

The big news, once again, was small caps. The small-cap Russell 2000 Index gained 6.2%, handily outpacing previously high-flying large-cap stocks.

Large-cap tech stocks had a huge year in 2020, and some investors may wonder if this recent downturn is a buying opportunity. But our indicators suggest that there’s stronger momentum behind small-cap and value stocks right now. 

It’s a small-cap world

Small-caps have dominated the markets in recent months. Over the six months ending February 28, 2021, the Russell 2000 was up 41%, while the tech-focused Nasdaq 100 gained just 7%. “Shares of small companies are outpacing their larger counterparts by the widest margin in more than two decades,” the Wall Street Journal found. 

Markets have historically cycled through periods when smaller-cap stocks led and years when large-cap companies were the place to be. The chart, below, looks back at the last 30 years of small- and large-cap trends. You can see these trends have typically lasted for years, but there are exceptions. Small caps trounced large caps in 2016, for instance, and then large-caps led for the next three years straight. Will this latest small-cap spike turn into a sustained trend or is it a brief reversal? Only time will tell. 

small and large cap trends 1990-2020

 

Small caps aren’t the only market change to watch these days.

Here are two other market changes FundX investment advisors are keeping tabs on.

1. Value investing is on the rise

The recent small-cap surge has coincided with a resurgence of value stocks, which is similar to what happened during the strong 2000-2005 small-cap cycle. 

Like small-caps, value stocks tend to do well during economic recoveries, and value stocks also may hold up better when interest rates rise, as we saw in February.  

Value sectors tend to include cyclical stocks, many of which were hit hard in the first part of the pandemic but could do well as the world reopens. “These kinds of stocks include banks and energy companies, whose profits tend to rise during periods of faster growth, higher interest rates and rising prices,” the New York Times explained.

2. Foreign markets aren’t keeping up

Many strategists predicted that foreign stocks would outpace US stocks in 2021, and investors have responded by buying emerging market stocks and international equity funds. But this may turn out to be premature as foreign markets haven’t kept up with US markets lately.

The MSCI EAFE Index of foreign stocks has returned about the same as the S&P 500 over the few months, and emerging markets barely budged in February, up just 0.8%. 

We think foreign funds are worth watching and we expect they’ll eventually come back into favor, but our methodology is keeping us focused on US funds for the time being. 

Are your investments keeping up with changing markets?

Most investors consider how they’ll invest through bull and bear market cycles, but they often don’t have a plan for changing market trends, and they could end up missing out on new opportunities this year. 

Our active investment approach is designed to capitalize on market trends, and as markets changed recently, we changed, too. We’ve added exposure to small-cap stock funds and small- and mid-cap value funds and ETFs in both the accounts we manage for our clients and in the mutual funds we manage.  

If you’re looking for a better way to respond to these changes, set up time to talk to a FundX advisor here or consider investing in the mutual funds we manage. 

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